Clay Shirky's Writings About the Internet
Economics and Culture, Media and Community,
Open Source

AOL's Brilliant Climbdown
1/12/2000
The word "synergy" always gets a workout whenever two media behemoths join forces
(usually accompanied by "unique" and "unprecedented"), and Monday's press release
announcing AOL's acquisition of Time Warner delivered its fair share of breathless
prose. But in practical terms, Monday's deal was made only for the markets, not for
the consumers. AOL and Time Warner are in very different parts of the media business,
so there will be little of the cost-cutting that usually follows a mega-merger.
Likewise, because AOL chief Steve Case has been waging a war against the regional
cable monopolies, looking for the widest possible access to AOL content, it seems more
likely that AOL-Time Warner will use its combined reach to open new markets instead of
closing existing ones. This means that most of the touted synergies are little more
than bundling deals and cross-media promotions -- useful, but not earth-shaking. The
real import of the deal is that its financial effects are so incomparably vast, and so
well timed, that every media company in the world is feeling its foundations shaken by
the quake.
The back story to this deal was AOL's dizzying rise in valuation -- 1500% in two years
-- which left it, like most dot-com stocks, wildly overvalued by traditional measures,
and put the company under tremendous pressure to do something to lock in that value
before the stock prices return to earth. AOL was very shrewd in working out the holdings
of the new company. Although it was worth almost twice of Time Warner on paper, AOL
stock holders will take a mere 55% of the new company. This is a brilliant way of backing
down from an overvalued stock without causing investors to head for the aisles. Time
Warner, meanwhile, got its fondest wish: Once it trades on the markets under the "AOL"
ticker, it has a chance to achieve internet-style valuations of its offline assets. The
timing was also impeccable; when Barry Diller tried a similar deal last year, linking
USA Networks and Lycos, the market was still dreaming of free internet money and sent
the stocks of both companies into a tailspin. In retrospect, people holding Lycos stock
must be gnashing their teeth.
This is not to say, back in the real world, that AOL-Time Warner will be a good company.
Gerald Levin, current CEO of Time Warner, will still be at the helm, and while all the
traditional media companies have demonstrated an uncanny knack for making a hash of their
web efforts, the debacle of Pathfinder puts Time Warner comfortably at the head of that
class. One of the reasons traditional media stocks have languished relative to their more
nimble-footed internet counterparts is that the imagined synergies from the round of media
consolidations have largely failed to materialize, and this could end up sandbagging AOL
as well. There is no guarantee that Levin will forego the opportunity to limit intra-
company competition: AOL might find its push for downloadable music slowed now that it's
joined at the hip to Warner Music Group. But no matter -- the markets are valuing the
sheer size of the combined companies, long before any real results are apparent, and it's
this market reaction (and not the eventual results from the merger) that will determine
the reprecussions of the deal.
With Monday's announcement, the ground has shifted in favor of size. As "mass" becomes
valuable in and of itself in the way that "growth" has been the historic mantra of
internet companies, every media outlet, online or offline, is going to spend the next
few weeks deciding whether to emulate this merger strategy or to announce some counter-
strategy. A neutral stance is now impossible. There is rarely this much clarity in these
sort of seismic shifts -- things like MP3s, Linux, web mail, even the original Mosaic
browser, all snuck up on internet users over time. AOL-Time Warner, on the other hand,
is page one from day one. Looking back, we'll remember that this moment marked the end of
the division of media companies into the categories of "old" and "new." More important,
we'll remember that it marked the moment where the markets surveyed the global media
landscape and announced that for media companies there is no such category as "too big."